Laughed out of the Laffer curve

In class today I presented a seminar on, among other things, the uses and abuses of the Laffer curve. Why it is not called the Laffer bell curve I have no idea; it is always drawn like one. The students were kosher at the extremes: a tax rate of 100% was likely to lead to near zero income tax for the state; similarly they totally grasped as would anyone that a 0 % tax rate times anything was zero. But then the chuckles started.

I suspect it would be a stronger argument if the Laffer curve was bell shaped but at the summit it was flat over say a range of at least twenty percent. The students simply would not buy that a reduction from say 60% on the income of the supper rich to 40 % would not only yield the same but greater tax revenues for the state. And it did not matter how many ad hoc conjectures I threw in: increase in hours worked from the supper rich and the increase in support staff that implied and thus the increase in national output and thus a larger economic pie to tax.

It was more than just that they did not believe that people worked that way it is that they immediately understood it as trojan horse for the rich to decrease their marginal tax rates. 30% of 10 million is still 3 million who would not take that? But I had to explain for the super rich the labour market really is a choice between leisure and income. And when you are super rich you just might ask yourself do I really need another million dollars?

But then there were the questions about the augmentation of state revenues through a reduction in the top marginal rates. And I said I only know of one: Russia. To which we all had to laugh.

EI Claims Up in September

The bulk of the descriptive meat is here:

“Continued large year-over-year increases in EI beneficiaries in large centres in the West

EI data by sub-provincial region, sex and age are not seasonally adjusted. Therefore, they are compared on a year-over-year basis.

In Ontario, the number of EI recipients more than doubled in 10 of its 41 large centres between September 2008 and September 2009. In the southern part of the province, Hamilton and Kitchener saw the fastest increases in the number of beneficiaries. In Hamilton, the number of EI recipients rose from 4,800 to 10,400, while in Kitchener, the number increased from 3,900 to 8,400. At the same time, the number of EI recipients in Toronto rose from 46,300 to 86,600.

In the northern part of Ontario, Greater Sudbury continued to experience a sharp year-over-year increase. The number of EI recipients rose from 1,500 in September 2008 to 3,900 in September 2009. At the same time, employment in Greater Sudbury declined, mostly in the natural resources sector.

The large centres of Alberta with the fastest year-over-year growth rates were Grande Prairie, Calgary, Medicine Hat, Red Deer and Edmonton. In Calgary, the number of people receiving regular benefits increased sharply from 4,000 to 18,800, while the number of beneficiaries in Edmonton rose from 3,800 to 14,900. These steep increases coincided with year-over-year employment losses for the province in manufacturing; natural resources; and retail and wholesale trade.

In British Columbia, 15 of its 25 large centres had twice as many beneficiaries in September 2009 compared with September 2008. In Vancouver, the number of beneficiaries increased from 12,600 to 31,300, while in Victoria, the number rose from 1,600 to 3,700. During this year-long period, employment losses in the province occurred in a number of industries, with the largest declines in construction; professional, scientific and technical services; manufacturing; and transportation and warehousing.”

The full report is here.

Delong is Wrong Again

What is up with Brad Delong?  It is like he is itching for a job in the Obama administration.  By his own admission he is no macro-economist but surely he knows the difference between effective demand at the level of the grass roots and supply push.  Then again maybe he is a macro-economists…of the fresh water variety.  Just read the following:

Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.

Here is a rather old fashioned idea: temporarily beef-up both the number of those covered by UI and the level of the replacement wage so that unemployed workers will have cash to spend on things like mortgages, rents, food and transportation.  Surely this seems better than hoping those who already have pockets full of cash will spend more of it and pull people out of employment.  And while unemployed workers are spending their UI, the Obama administration can find a little bit of breathing room to come up with a coherent plan to the financial mess instead of playing hanky panky ad hocery with the Fed, the Treasury and Wall street.

Dude trickle down is so like…the eighties.

Gindin 1 Hargrove 0: GM announces 1000 less jobs

Travis Fast

If I know Sam Gindin at all he is less than elated about today’s announcement by GM.  Nevertheless Sam and many CAW activists have long argued that givebacks do not save jobs.  It was a little churlish of officials with the CAW to point to the Feds as part of the problem.  GMs announcement today was simply a confession that management had made huge errors in betting so much on large gas guzzling autos.  The FT reports that GM is even considering spinning off the Hummer Brand.    Ten cents off the Canadian dollar will not remedy the problem.

Explaining Unemployment: Natural Accelerating Rate of Employment Destruction (NARED *tm)

Travis Fast

In the great labour market policy debate of the mid to late 1990s no end of explanations for persistently high levels of unemployment in the face of recovered GDP growth was trotted out. The infamous NAIRU curiously did much of the original heavy lifting. I say curiously because the NAIRU is ill suited to provide an explanation of persistently high unemployment in the face of strong GDP growth. Indeed, the NAIRU, was designed to put a gloss on the problem of stagflation–poor growth and high inflation. At a higher level of abstract policy thinking however, the NAIRU was part of broader assault on demand determined explanations of macroeconomic phenomena including unemployment. Fighting inflation and ultimately conquering it was said to be the sine qua non of renewed GDP growth.

The renewal of GDP growth was in turn said to be the cure to high unemployment (as we shall see towards the end this is the central determinate of unemployment). Yet, by the latter half of the 1990s the term “jobless recovery” had crept its way into the policy lexicon. Here the NAIRU became near useless as a supply side explanation for the persistence of high unemployment. And it was here (then) that I would argue New Keynesianism played a vital role in the continuance and ultimate dominance of supply side explanations of unemployment and what I have called the solidification of the neoliberal consensus.

To that end two explanations were put forward. The hysteresis/skill spoilage thesis maintained that prolonged periods of unemployment had caused a relative degradation in the skills of the unemployed. This degradation of skills in turn was responsible for the inability of of the unemployed to find jobs. In short, high unemployment was the cause of high unemployment (hysteresis). The insider/outsider hypothesis maintained that the persistence of unemployment was caused by the higher than marginal productivity wages of the employed. In a real bastardization of Keynes, involuntary unemployment was caused by the myopic behaviour of the employed (a refusal by existing workers to take a pay cut). If the two explanations did not readily hold together in a general theory sense they certainly held together at a higher level of abstraction: ultimately the cause of unemployment laid with the qualities of workers: employed or unemployed–on the supply side.

And although the twin New Keynesian hypotheses had a hard time dancing on the same floor they nonetheless were seemingly given credibility by inter temporal comparisons of GDP growth and rates of unemployment. In the graph below five year averages for real per capita GDP growth and unemployment rates are plotted.

If one looks at the five year averages from 65-70 through to 95-00, one cannot help but notice that during the 1980s a transition seemingly occurred whereby similar levels of GDP growth failed to produce similar rates of unemployment. The most stark comparisons can in fact be made. During 65-70, a 3.1 percent average growth in GDP produced and average unemployment rate of 4.5 percent whereas in the 95-00 period a 3 percent average growth in GDP produced an 8.5 percent average rate of unemployment–a full 4 percentage point difference. It was from such facts that, I think New Keynesian hypotheses drew their succour.

Why indeed had GDP growth recovered but not employment? But there were a couple of constraints on the types of explanations that REAL economists were allowed to make . You could not blame technological change, nor could you blame free trade and you certainly could not blame employers sweating more effort out of the existing workforce. The key to a righteous explanation laid with the supply side characteristics of workers. Now I am not arguing that there was some kind of conspiracy. Far from it, I am just arguing that the the new classical victory had been so total and that the terms of war had become so solidly placed on a different terrain that New Keynesians were bound to reach for explanations that jived within the increasingly narrow confines of the debate within mainstream liberal economics. Just think of all those more classically inclined liberals who made the reluctant Keynesian Devil Shift during the Golden Age Illusion. After all, once upon a time Friedman was a Keynesian.

But whatever the cause, those observed facts are not sufficient to explain the seeming disparities between the two epochs. In fact, the same disparities can be witnessed within the same epochs! Notice for example that in the period form 60-65 GDP growth was 4.3 percent but unemployment averaged 5.7 percent–GDP growth and the rate of unemployment being 1.2 percent higher than the proceeding period. Were insiders really more active in the 60-65 period than in the 65-70 period? Were workers skills duller in the 60-65 period than in the proceeding period? The sober answer is of course not. And one could beg the same question of the 95-00 and the 00-06 averages. How is it that within such a short period of time we could move from a 3 percent rate of GDP growth and a corresponding 8.5 percent of unemployment to a 2.1 percent average rate of GDP growth and a corresponding 6.8 percent of unemployment? I suppose if one takes the hysteresis hypothesis at face value we could get to a plausible explanation of the present period but that dog won’t hunt for the initial periods under consideration. And it is not much of hunter in the two most recent periods either.

In the graph below I have hyper-trended the data by superimposing a trend on the five year averages. What becomes apparent is the the close relationship between GDP growth and unemployment. But beyond this shocking truth is the more subtle observation that the early 1990s seemingly marked the end of the long secular slowdown in real GDP growth which began in the mid 1960s (for further confirmation see the last graph for long term trends in GDP growth and Unemployment). This slowdown in turn produced a Natural Accelerating Rate of Employment Destruction (NARED).

It would be perverse in this respect to employ hysteresis effects in skill (de)formation to explain increasing unemployment. Notice, however, that hysteresis effects in the degradation of business sentiment might be a plausible explanation of the duration of the long slowdown. Although I have serious doubts about a 40 year long hysteresis effect on sentiment and rather think that some version of the Brenner/Shaikh/Marxian thesis is necessary.

However, leaving the cause(s) of the structural decline in GDP growth to one side, the other observation that can be made from the two graphs presented above is that it seems as though during the early 1990s a reverse process was initiated whereby increasing levels of GDP growth began to have a cascading effect on the level of unemployment so that by the early 2000s the brief drop in GDP growth was not sufficient to change the momentum in employment creation; or, what I have identified as a Natural Accelerating Rate of Employment Creation (NAREC).

On this reading, the present conjuncture is quite significant. Should GDP growth become stuck at low stagnant levels for a period of time the acceleration effects could revert back to a NARED dynamic whereby high unemployment begets even higher unemployment irrespective of the supply qualities of workers.

This analysis and scenario poses serious challenges to the dominant neoliberal policy paradigm. No amount of retraining, mobility or cuts to the reservation wage can remedy a situation in which the creation of employment is weak. Focusing on the skill set or psychological attitudes towards work on the part of workers simply serves to blame the victim and ignores the cause: weak GDP growth overtime creates higher levels of unemployment. Workers do not retreat from the labour market on mass, as any graph of participation rates can demonstrate, because most workers have no alternative but to seek employment. And I suppose in that last regard unemployment is caused by the unemployed.

Note: Sources

Table 282-0002 – Labour force survey estimates (LFS), by sex and detailed age group, annual.

Data prior to 1976 is from Statistics Canada 11-516-XIE (FREE!) Historical statistics of Canada.

GDP data prior to 1961 is from Madison The World Economy: A Millennial Perspective

Givebacks and Handouts are not a Viable Model for the Big Three, Unions or Government

Travis Fast

The leadership at the CAW can call it whatever it wants but it already has a name and it is called concession bargaining. And the problem with concession bargaining is that it does not work if the desired goal is to preserve the health of the company and above all jobs. Workers do not control the means of production they tend to them and they do so in terms dictated by management. All the concessions in the world will not fix the problems at the Big Three auto makers. Those are larger structural problems of which the union has no control.

Here is Sam Gindin on the problem with concession bargaining as outlined in his article:

The CAW and Panic Bargaining….As many CAW members know from experience and the union’s educational programs, concessions don’t guarantee jobs. Jobs depend on so much else beyond the control of workers – from the economy, trade policy, exchange rates and the chaos in financial markets, to the age of plants, technologies used, and especially the models placed in the showrooms. Currently, jobs also depend on the extent to which the new vehicles are sensitive to the implications of escalating oil prices and environmental concerns. At the end of the 1970s, when the concessions period began to unfold, UAW Big Three membership totalled some 760,000 in the USA. In spite of the concessions, the UAW repeatedly accepted over the following years, that membership is now down to about 165,000 – almost 80% of the jobs gone.

What concessions do guarantee is more of the same: why would any company that found this golden egg, not keep coming back for more? They also tend to confirm the belief that workers are the problem: if workers are making concessions to save jobs, aren’t they essentially admitting that the gains they won earlier were the problem? So, aren’t more concessions, rather than other policies, the answer? Most dangerously, concessions leave workers cynical about the worth of their union: why get active if unions aren’t in fact fighting back? This concern with the potential cynicism of a new generation of workers was one of the reasons that Hargrove rightly opposed the UAW permanent two-tier system with its discrimination against young workers coming into the factories.

And if you find Gindin too left for your taste here is a comment from the right, Stephen Gordon

And if you give food to raccoons, they won’t come back

From the Toronto Star:

More money for GM despite layoffs, McGuinty says:

Premier Dalton McGuinty says Ontario will give General Motors more money for new projects, despite thousands of layoffs announced by the automaker.

GM wants the Ontario and federal governments to contribute about $140 million towards a new engine plant in St. Catharines, Ont., and a new research centre in Oshawa.

GM has received about $250 million in provincial money, and recently announced layoffs of 1,400 workers in Windsor and about 900 in Oshawa.

But McGuinty says Ontario is still competing with U.S. states to land new automotive projects and must be prepared to pony up some cash.

Why do governments still think that they can win this game?

What both Sam Gindin and Stephen Gordon are pointing to is the tendency of the Big Three to rely on givebacks by workers and handouts by governments in place of developing a truly coherent and viable business model. And when things go wrong the companies revert to their model: Givebacks and Handouts. Neither of which preserves wages or jobs; both of which Unions and Governments were hoping to preserve.

The shocking truth about an IMF working paper: Labour market mobility in Canada

Travis Fast

Some mornings I wake up hoping that my capacity to predict the “robust” findings of liberal economists will have dissipated and that something counter intuitive and not part of the conventional liberal economic wisdom will appear. To that end I started reading through IMF reports this morning, hoping that I could not pre-scribe the predictable findings on central questions like the degree of labour mobility and its relationship to unemployment. To wit, I came across a working paper entitled Shocking Aspects of Canadian Labor Markets. Imagine my thrill. However, right from the summary I realized that the economists who wrote the paper fancied themselves as persons plain with whit and irony. The conclusion reads :

Labor markets within Canada seem to become more flexible as one moves to the
west. Migration plays a much more important role in labor market adjustment in the western
provinces than the Atlantic ones. Turning to the central provinces of Ontario and Québec, the
evidence suggests that Ontario has a significantly more flexible labor market than its
neighbor, consistent with microeconomic evidence on migration. Further analysis indicates
that migration appears to be the main process through which labor markets adjust over time,
with real wage differentials being a minor factor. Finally, the adjustment process appears
relatively similar across macroeconomic disturbances. In short, labor adjustment appears
very different east and west of the Ottawa river.

Shocking hey. The paper not only confirms liberal economists predeliction for blaming the victim but also the long held stereo-types in the Canadian body politic. And just how do they derive such a bold conclusion? Easy they construct their metric of labour mobility by dividing total net regional migration by total regional population. Eh voila, those bloody Eastern Canadians are a bunch of sedentary hillbillies who refuse to move to where the jobs are .

I have long been a skeptic of conventional economic wisdom; and even more so of conventional regional stereotypes so I decided to check the data. As far as the authors’ constructed metric of mobility goes it is correct. ‘Correct’ as in they got the numerator and the denominator right. But the metric is flawed. Why net migration? Surely the question concerning mobility is one of an individual’s willingness to leave the province or region . That is, what we want to know is how many persons as a percent of the total population are willing to leave their province of origin. How many persons who arrive in that region are of no consequence to the question of mobility because mobility is a question of the incidence of out migration. Net migration is therefore a lousy metric.

Let me hammer home this point with a little more force. Why should BC gain points on the mobility meter because there are more individuals entering the province than leaving? What do the truck-loads of senior citizens fleeing the Prairie winters have to do with labour mobility? ‘Nothing’ is the reasonable answer unless of course one is plumbing for a confirmation of the conventional wisdom.

The only reliable semi reliable statistic for mobility is out migration; flawed as it is. Why flawed you ask? for the reason just outlined above. Why should Saskatchewan gain points for labour mobility if the bulk of out migration is from the retirees moving to the relatively balmy lower mainland of British Columbia. Indeed, for these reasons we should be more skeptical of central and prairie province out migration figures as they do not distinguish between workers and retirees.

But let me run the the out-migration as a percent of total population for the regions as a metric of labour mobility. Below the regional statistics mirroring the IMF working paper on regional aggregations are presented.

What a difference a metric can make! By this metric labour mobility is higher in the East, lowest in Central Canada and middling in the West. All this of course makes very good sense to a Marxist or heterodox political economists. Labour is a special kind of commodity which is doubly free. Workers are free to contract with whichever employer they so chose but chose they must because they are ‘freed’ from the means of production at the same time. So within this frame one would be led to predict that even though the bonds of family, community and culture be strong there is simply no substitute for a job. That is, that individuals leave their place of origin at all is a testimony to the relative power of labour markets to “make all that is holy profane.” Thus, it is no surprise to Marxist economist that mobility should be greatest in the areas of relative economic stagnation and less so in those regions of relative economic stability. Indeed, it is but the history of immigration to Canada.

If we disaggregate the regions into their constituent parts the picture remains, by and large the same, although it is curious that central Canadian mobility rates, i.e., Ontario and Quebec, should be declining given that in the 2000s the hot labour markets are decidedly in the West. What then are the results of this brief study of mobility? The exact opposite of the conclusions drawn in the IMF working paper study. Labour mobility has tended to be highest in the provinces with stagnant economies and lowest in the provinces with stable employment. As the relative economic fortunes of the regions has shifted so too has the degree of mobility. Although this result is tempered by the most recent data. As labour mobility is highest in East despite the oil induced boom in GDP growth and lowest in the central Canadian provinces despite the decline of the manufacturing sector and aggregate unemployment rates. The east can be excused owing to the fact that an oil price led boom has not translated into a white hot labour market. That is, relatively high unemployment remains and that, as any Marxist political economist would predict, is a good determinate of outward-migration. That the Western provinces still place second despite white hot labour markets and central Canada still places third in the new millennium, is a plague upon all theoretical houses. So indeed there are, after all, some shocking aspects of Canadian labour markets to be explained.

Update

One possible explanation for the low mobility in Ontario could be its history of relatively high levels of employment which means that when workers are laid off they tend to be able to both qualify for EI and eventually find new employment in the province.  In any case, we would need better data to see what internal provincial migration looks like.  It could simply be the case, given the size and diversity of both Quebec and Ontario’s economy, that workers do not relocate to other provinces but relocate to to other regions within their respective provinces.  That is, surely moving from the Sioux to Toronto ought to count as mobile labour.